Help Wanted: Disruptor for Today’s Home Building Market
AUSTIN – (By Richard Webner for Realty News Report) – Home prices are up. Affordability is down. And the home building industry may need a disruptor to create the housing that matches the demands of the millennial generation, according to industry speakers at a Texas builders conference.
Even after rebounding from a scary fourth quarter 2018, the national homebuilding industry faces significant affordability and supply problems, said Jeff Meyers, chief executive officer of Hanley Wood/Meyers, at the Digital Transformation Summit (DCX) conference in Austin.
The biggest challenge facing the industry is that builders aren’t building enough homes, and haven’t been throughout this entire economic recovery, which is now the longest in U.S. history, Meyers said. “We haven’t been the big recovery machine that we have been historically.”
A lack of affordable housing on the market is another major hurdle for the industry, because home prices and inflation together have risen at nearly double the rate of wages in recent years, he said. Home prices are soaring in many markets that have historically seen modest annual price increases in the 2 to 3 percent range, such as Dallas, with increases above 10 percent, and Denver, around 20 percent.
“We’ve out-priced the buyer in a lot of markets,” Meyers said. “Wages just have not gone up fast enough.”
The fourth quarter of 2018 was a tumultuous quarter for the homebuilding industry, with a lot of major U.S. markets suffering declines year-over-year in the wake of drooping economic conditions, Meyers said at last week’s conference. Mortgage rates rose to nearly 5 percent that quarter, while there were drops in U.S. retail sales, the S&P 500, and China’s gross domestic product.
There has since been a rebound, but not a robust one, he said. Rates for a 30-year fixed-rate mortgage settled to 4.14 percent last week, according to Freddie Mac.
“It’s been a nice recovery, we’ve seen a lot of price increases, things like that, but it’s not been a spike by any means,” Meyer said. “It’s more that a lot of these markets are just average.”
Millennials are a huge opportunity for the U.S. homebuilding market because they are tired of rising rents and are looking to move into nice homes, he said. The industry would benefit from a disruptor along the lines of Amazon, AirBNB or WeWork to tackle the problem of building smaller homes at lower costs, he said. He pointed out that builders in Germany have figured out ways to construct homes in only 30 days.
“Our industry needs a disruptor,” he said. “I think that will force us into a situation to allow things to really start accelerating.” David Brown, a senior vice president for Metrostudy in Plano, said the national homebuilding market is “reacting very appropriately” to the setback in the fourth quarter, with housing starts easing down in response to the sales drop.
“In past cycles we haven’t reacted that quickly and so that inventory has built up much, much more,” he said. The nationwide supply of finished vacant inventory – in other words, homes that have been built but not sold or occupied – increased 14 percent in the first quarter, Brown said. He views that statistic as a “canary in the coal mine” because when it rises it indicates increased competitiveness between builders, he said.
Many homebuyers prefer new homes but end up buying existing homes in the resale market ones because they find the process of shopping for a new home too difficult, said Peter Brumme, vice president and general manager of Builder’s Digital Experience, an Austin-based firm which presents the annual conference focused on digital marketing and home buying trends.
Today’s buyers worry about whether they can trust builders and whether they can find the information they want, Brumme said.
They are often confused by pricing and have trouble visualizing the home that would be built. When buyers run into these difficulties, which Brumme calls “friction,” they are 20 percent more likely to buy an existing home even though they prefer a new one, he said.
“We’re losing money because of our customer experience,” Brumme said. Sometimes, Realtors steer buyers who prefer new homes to used ones because they know the used market better than new, he said. The homebuilding industry needs to make sure Realtors know how to sell new homes, he said.